The Laffer Curve works

Even though supply-siders often criticize Bank and Fund policies, the fact is that they are more receptive to their ideas than universities because they have to operate in the real world. Every day, they see the consequences of excessive tax rates in operation in countries that need revenue a lot more than feel-good redistributionist policies. They can't afford to overtax the rich, or they will just move or bribe the tax officials to leave them alone. Either way, the government doesn't get any tax revenue to spend on pressing social needs.

Furthermore, Bank and Fund officials have seen with their own eyes the impact of low marginal tax rates in places like Russia, where implementation of a 13 percent flat tax in 2001 led to a significant increase in government revenue. Although rates were much higher under the old system, evasion was so pervasive that little revenue was actually collected. Under the new system, it was no longer worth as much to risk punishment for evasion, leading to increased compliance and higher revenues.

OK, my friends at TAPPED might say, but what about academia? Isn't supply-side economics still ignored there? The answer is no. A good example is Nobel Prize-winning economist Robert Lucas of the University of Chicago. After many years of dismissing supply-side economics in much the same way TAPPED does, he finally took a serious look at it. In a 1990 article in the Oxford Economic Papers, he admitted that he had been wrong, that reducing taxes on capital could in fact deliver a huge economic windfall, just as the supply-siders had argued.

Said Lucas, "The supply-side economists, if that is the right term for those whose research I have been discussing, have delivered the largest genuinely free lunch I have seen in 25 years in this business, and I believe we would have a better society if we followed their advice."

Earlier this year, Lucas reiterated support for supply-side policies in his presidential address to the American Economic Association. He compared supply-side economics with Keynesian stabilization policies and found the former far superior to the latter. "The potential gains from improved stabilization policies are on the order of hundredths of a percent of consumption, perhaps two orders of magnitude smaller than the potential benefits of available 'supply-side' fiscal reforms," he concluded.

Space prohibits the presentation of further evidence, of which there is ample. Suffice it to say that supply-side economics is far from the academic outcast its enemies wish it was.

Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.

Be the first to read Bruce Bartlett's column. Sign up today and receive Townhall.com delivered each morning to your inbox.